What’s happening

and what it means to you

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30.01.20 – Fine Wine Investment –

Last week the Liv-ex undertook its annual flagellation of
esteemed members, under the banner: “Fine wine prices in 2019: merchants’
predictions vs reality”. It is to be hoped anyone not in need of a giggle
looked no further than the headline. Why do this to themselves, you might ask?
Well they do exactly the same in mainstream markets, with exactly the same
results. No matter how much an investment bank pays its global strategist there
always seems to be a copious amount of egg on face.

Nor are we at Amphora about to argue that we would do any
better, because it is an impossible task. The trouble is, some people do
actually take notice of it all. Investors have their favourite pundits, and the
better of those pundits stick to simple explanations of what has just happened, and why, and what the variety of outlooks might
look like, and the strategies you might use to play them. It is seldom wise to
bet the farm on a forecast, which is why we advocate a risk-weighted approach.

Some advisers plug the “dog of the previous year”, an
approach which has a decent record of success, provided the dog in question has
underperformed for market reasons, as opposed to malfeasance. This policy might
be seen as the direct opposite of that taken by Liv-ex members in the above
survey who forecast that Burgundy would be the best performing sector last
year, when it turned out to be the worst.

You might think that this is why we are currently warming
towards Bordeaux, which has had a quiet couple of years following its rally from
the end of 2015, and up to a point you would be right. The picture in the fine
wine market is somewhat more complex though, because the market has had a
decade of almost constant evolution, and this has come at a cost to Bordeaux.

The reason is that up until about 2010/2011 there was little
else to invest in. Bordeaux wines had a grip on the market as a result both of
familiarity and marketability. A lot of the US and Italian producers, for
example, had insufficient history and established pedigree prior to that. The
skyrocketing prices for Bordeaux wines up to June 2011 helped establish both
the concept of fine wine
as an investable, and the possibility that what held for Bordeaux might
also hold for Tuscany, Napa Valley, and most extravagantly over the last 5
years, Burgundy.

As the market evolves in this way there is always the
temptation to wonder where the spotlight might fall next, a topic we have
explored in some detail in the past, and which is never far from our attention,
but what does this all mean for Bordeaux? Is it now destined to be the
perennial bridesmaid as the market pursues its expansionary phase?

Let’s consider the expansionary phase first. The thing about
these new kids on the block is that they simply haven’t been produced in
sufficient quantities to absorb all the potential interest. Masseto’s
production levels are on a par with Petrus, as are the Monfortinos. There is a
crucial difference, however, in so far as Bordeaux wines are effectively restricted
by statute from producing any more. In Italy there are only restrictions on DOC
accredited wines.

This is different from the Super Tuscans, which are IGT
apart from Sassicaia (granted its own DOC in 1994), indeed from most wines made
outside of Bordeaux. The only thing which restricts non-Bordeaux wine
production, in theory, is the size of the vineyard. There are restrictions as
to grape and geography but that’s basically it. Obviously the winemakers aren’t
going to use inferior grapes or cut corners on production techniques, but all
other things being equal there is nothing to prohibit an increase in
availability.

Fine wine investors are very well aware that diminishing
availability accompanied by increasing desirability as the wine improves as it
ages are the cornerstones of the investment dynamic. It is a distinguishing
feature of Bordeaux wines that production levels cannot be increased, and we
believe this singular fact is likely to bring the spotlight back round to that
region in due course.

The consequence of these ruminations is the consideration of
weightings. For the last couple of years you would have outperformed had you
underweighted Bordeaux, but you would have wanted to be overweight in the two
years prior to that. Yet no-one can safely argue that this is a trader’s
paradise, because transactions costs are high as a result of the underlying
asset being physical.

How, therefore, to play it? In a mainstream market most
investors are advised to keep dealing costs to a minimum, and most advisers
advocate regular tailoring but irregular major surgery. At Amphora we would
suggest that you can happily forget the tailoring, and to make major portfolio
switches only when there is high conviction. Currently we are warming towards
Bordeaux, but think there is still mileage elsewhere. As we move into 2020 we
expect to be able to signal a more major move back towards the Right and Left
banks.

We believe that investing in wine should be both enjoyable and profitable, but like any traded commodity there are risks and wine can go down in value as well as up. Amphora is an audited member of the Wine Investment Association, but neither Amphora nor the wine market in general is regulated by the Financial Conduct Authority.

Paintings produced with kind permission of the artist Michael Kidd. To see them in their full glory click here